Deemed sales
In view of the amendments to our Constitution, transactions which are notsales as understood, such as supply or use of goods during execution ofindividual works contacts, lease of assets or hire-purchase of goods, cannow be taxed as deemed sales under a state sales tax law. All the stateshave placed hire-purchase of goods on par with sales, subjecting both to thesame set of provisions. While applying VAT to hire-purchase transactions,the issue is as to how to determine the value added by the owner of thegoods, would it be difference between the purchase price of the goods andthe aggregate of all the hire-purchase installments, which essentially wouldbe in the nature of finance charges?

Levy of VAT on such difference has been challenged before the court asunconstitutional. On sale of the asset on the hirer opting to purchase thesame, tax may be attracted depending upon the provision of the concernedstate law. In the case of lease of assets some states have preferred not tolevy tax, in essence VAT, on the lease rentals (which too would be in thenature of finance charges) where lease is of the asset which has beensubject to tax under the State sales tax law. Even where such exemption isnot granted, lease rentals (which obviously would also cover cost of theasset during the period of lease) are normally subject to tax at a ratelower than that applicable to sales of the same type of asset. Sale of theasset not taxed earlier attracts tax on sale thereof after the lease periodis over.

In the case of indivisible works contracts, many states have provided forexemption from payment of works contract tax on the value of tax-paid goodssupplied/used as they were purchased during execution of the contract. It isobvious that difference between the cost of inputs and the contract pricewould be the value added, without any set-off against tax payable in respectof the works contract subject to provisions of the State law.

Subtraction method
This method involves levy of tax at the full applicable rate on the saleprice of the goods as reduced by the purchase price thereof. This method waspart of the levy in Maharashtra. While this method too involvesidentification of the goods purchased and sold, it solves the case of refunddiscussed above. Where sale price is less than the purchase price,difference being a negative figure, neither VAT is payable nor any refund oftax paid on purchase is available.

As, however, in the near future states are expected to adopt only theinvoice variant and subtraction method, we need not go into details of othervariants.

The author is a chartered accountant